MultiCat Mexico 2012 cat bond may not trigger, hurricane Odile data shows

by Artemis on December 22, 2014

The fate of the MultiCat Mexico Ltd. (Series 2012-1) catastrophe bond, after hurricane Odile threatened to trigger its Class C notes, looks more secure as the official report data from the National Hurricane Center suggests a loss may not be guaranteed.

Update: It has been confirmed that the notes will not face a loss due to hurricane Odile after the calculation agent report agreed with our assessment below.

Original article: The MultiCat Mexico 2012 catastrophe bond features a parametric trigger. The Class C notes, which are the ones exposed to hurricane Odile’s landfall, stipulate that for the notes to be triggered the central pressure of the storm within the parametric box must fall between 932mb and 920mb to result in a 50% loss of principal, or below 920mb to cause a 100% loss.

When hurricane Odile made landfall on the Baja California peninsula of Mexico the NHC had the central pressure reported as being 930mb. That number, with the release of the final tropical cyclone report for hurricane Odile, has been raised quite significantly which makes the chances of the cat bond being triggered look much less likely.

The calculation agreement for the MultiCat Mexico 2012 cat bond specifies that the final assessment, of whether the cat bond notes are triggered, will be based on the data released by the NHC in its post event tropical cyclone reports using the ‘best track’ data analysis it provides. That best track data is now available and it points towards the cat bond perhaps being safe from loss.

Using the ‘best track’ data, which includes the NHC’s confirmed analysis of hurricane Odile with data on the intensity of the storm in six-hourly positions, the calculation agent AIR Worldwide will be asked to establish, using its calculation process, the central pressure of the storm when it was within the MultiCat cat bond’s parametric hurricane zone for the threatened Class C notes.

The data provided by the NHC in its report makes it look extremely like the Class C note holders will not face a loss. We cannot say this for certain, as we do not know the calculation process to extrapolate the central pressure along hurricane Odile’s path, however just looking at the data points provided by the NHC makes it look (to us) extremely unlikely that MultiCat will be triggered.

In the report, the NHC now states that the estimated central pressure of hurricane Odile at the point of landfall was 941mb. That’s a significant increase from the 930mb that the earlier report had suggested.

The parametric box for the Class C MultiCat Mexico cat bond notes begins a little way off the coast from Mexico, so the fate of the cat bond now lies in the calculation process which will extrapolate the pressure along the line between the two closes ‘best track’ reporting points.

The best track data from the NHC gives a measure for central pressure in six hour intervals. The central pressure for the point prior to the 941mb landfall is reported as being 932mb, right on the threshold for the MultiCat Class C notes to be triggered. The data point location for the 932mb reading is around 117km away from the landfall measurement, which looking at the design of the parametric box for the Class C notes could put that estimated reading of 932mb outside the box entirely.

That means that the calculation report extrapolation of the pressure along the best track is almost certain to show a gradual rising of the central pressure as Odile approached the 941mb landfall point, which makes it almost certain that the pressure has to be above 932mb as the storm moved between these two readings.

So the only uncertainty that remains, from our viewpoint, is if the 932mb reading is actually within the parametric zone and if there could be a lower pressure reading somewhere in the box. The previous data point on the best track is 923mb, but that reading is at approximately 280km from the landfall point, which we feel is likely well outside the parametric trigger zone.

It’s interesting as some investors and secondary catastrophe bond traders we spoke with after hurricane Odile made landfall expressed their doubt that the cat bond would actually be triggered for just these reasons. There was a general feeling that the data on central pressure typically increases when the final report is released and with that a significant possibility the fate of MultiCat looked potentially safe.

Hence the secondary markets had not seen much in the way of actual trading of the MultiCat Mexico 2012 Class C notes, despite the fact the trading desks had discounted their published bid/offer guidance by around 50% to suggest a loss was imminent. It now looks like anyone who bought at those prices, if they could actually find a seller, could have made a very shrewd call.

We have to restate that we cannot be 100% certain that the notes are safe, but it looks increasingly to us as if they will be if the latest data from the NHC is taken as the source for the final calculation agent report, which we believe it is supposed to. It will require the final calculation agent report for us to say 100% that investors in the MultiCat Mexico Class C notes are safe.

The calculation report is due within 15 days of the final report and best track data being released. So if this report, which was published on Friday 19th December, is the one to be used investors could know whether their positions are safe very quickly.

You can see the report from the NHC on hurricane Odile here. We will update you should we hear anything further on the fate of the MultiCat Mexico 2012 catastrophe bond.

Read out previous coverage of the fate of the MultiCat Mexico 2012 cat bond after hurricane Odile’s landfall:

Did hurricane Odile just trigger the MultiCat Mexico 2012 cat bond?

MultiCat Mexico 2012 cat bond payout not guaranteed yet.

Fate of MultiCat Mexico 2012 should be known within 120 days: S&P.

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